In-Shape Health Clubs, LLC – California Gym Operator Succumbs to COVID-19, Executes APA with Aquiline Capital Partners (Also to Supply DIP Financing) and Former CEO Paul Rothbard

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December 16, 2020 – In-Shape Health Clubs, LLC and two affiliated Debtors (“In-Shape” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-13130. The Debtors, a California-centered health club operator with approximately 47 remaining locations, are represented by David M. Fournier of Troutman Pepper Hamilton Sanders LLP. Further board-authorized engagements include (i) Keller Benvenutti Kim LLP as general bankruptcy counsel, (ii) Chilmark Partners, LLC as financial advisors and investment banker, (iii) B. Riley Financial, Inc., as real estate advisor and (iv) Stretto as claims agent. 

The Debtors’ lead petition notes over 100,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Aquiline Capital Partners ("Aquiline") (an uncertain amount of recently purchased prepetition debt that is to be classified as a deficiency claim), (ii) ISHC Properties, LLC ($9.4mn subordinated note claim) and (iii) Realty Income Properties 12, LLC ($6.2mn rent claim).

In-Shape was founded in 1981 by Mort Rothbard. Mort Rothbard’s son, Paul Rothbard, was the Debtors' Chief Executive Officer until 2016 and a Board member until September 10, 2020.

In 2012, Fremont Group purchased 78% of the Company from the Rothbards and their co-investors and remains the majority equity owner of ISHC. 

In a message to clients, the Debtors advised that: “While thousands of health clubs and gyms have been operating safely across the nation throughout much of the pandemic, California’s restrictive COVID-19 policies have severely damaged the state’s fitness industry and have dramatically impaired In-Shape’s revenue for nearly 10 months. Despite beginning 2020 as a strong, thriving company, this has led us to take steps to restructure so we can focus our resources to ensure our long-term viability. In-Shape has been helping Californians to stay healthy, fit and happy for nearly 40 years, and we’re not going anywhere.”

Proposed Asset Sale

On December 16, 2020, the Debtors entered into the Asset Purchase Agreement (the “APA” attached to the Debtors’ bidding procedures motion at Exhibit C) with In-Shape Acquisitions 2021, LLC (the “Purchaser”). The Purchaser is an acquisition entity created by a group that includes Paul Rothbard, a former CEO of the Debtors and son of the Debtors’ founder, and Aquiline which recently purchased the entirety of the Debtors’ prepetition senior debt from Bank of America, N.A on October 30, 2020. The sale process in respect of that debt was apparently at the insistence of the Bank of America. Pursuant to the APA, the Purchaser will, subject to the requirements of Debtors’ intended section 363 sale/auction process, purchase substantially all of the Debtors’ assets and will assume the leases relating to up to 45 clubs and pay any associated cure costs. 

Lease Terminations and Negotiations

Prior to the outbreak of COVID-19, the Debtors' club portfolio consisted of 65 locations (plus 3 locations that had previously closed), all of which were leased properties. As a result of the closures forced by the pandemic, unsuccessful negotiations with certain landlords, and an effort to streamline its portfolio and exit underperforming or otherwise burdensome clubs, the Debtors have terminated leases at 21 of its locations, resulting in a leased portfolio of 47 clubs as of the Petition Date. The Debtors intend to reject the leases for an additional 4 costly or underperforming clubs that were not included in the Purchaser’s list of purchased leases."

DIP Financing

The Debtors have secured commitments for $30.3mn of debtor-in-possession (“DIP”) financing consisting of (i) a new money multi-draw term loan facility in an aggregate principal amount of $15.3mn ($5.1mn with an interim DIP order) and (ii) upon issuance of a final DIP order, a deemed term loan “roll-up” of $15.0mn of the Debtors’ prepetition first loan obligations (the “Prepetition First Lien Obligations”), with the roll-up to be increased on a dollar-for-dollar basis by any amount (if any) of new money advanced to the Debtors in excess of the $15.3mn.

Prepetition Indebtedness

The Debtors are party to a “Prepetition First Lien Credit Agreement” with Aquiline (as successor to Bank of America, N.A.), as Administrative Agent and Collateral Agent, and certain lenders identified therein (the "Prepetition First Lien Lenders') and which consists of a revolving commitment in the aggregate of up to $17.0mn and a term loan commitment in the aggregate of up to $53.0mn as well as certain letters of credit. Aquiline purchased the entirety of the debt outstanding under these facilities on October 30, 2020.

As of the Petition date, the Debtors owe not less than $64,686,197 under the Prepetition First Lien Credit Agreement including (i) $14,030,000 in principal amount of revolving loans, (ii) approximately $49,356,250 in principal amounts of term loans and (iii) approximately $1,299,947 of interest.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Maloney Declaration”), Sean K. Maloney, the Debtors’ Chief Financial Officer, detailed the events leading to In-Shape's Chapter 11 filing. The Maloney Declaration provides: “Following the shelter-in-place order on March 19, 2020, and the closure of nearly all of its clubs and the temporary lay-offs of 93% of its employees, In-Shape went into cash conservation mode as it worked diligently to plan and implement comprehensive health and safety measures in anticipation of reopening….The Company also sought rent reductions and abatements from its landlords and ultimately stopped paying rent at clubs while they were closed.

Despite the Company’s efforts, the series of club closures caused by COVID-19 and the government mandates over the 9-month period leading up to the Petition Date, and the resulting loss of revenue, caused a deterioration in the Company’s liquidity position. In the months leading up to the filing of these chapter 11 cases, it became clear that, without additional liquidity through a sale or a financing transaction, the Company would run out of cash and be unable to operate and would have no choice but to liquidate. Accordingly, the Company worked with its pre-petition secured lenders to look for new investment or financing in connection with its cash needs and to engage in a marketing process for the potential sale of some or all of its business…”

About the Debtors

According to the Debtors: “For over 35 years, In-Shape has created places of belonging and connection that motivate its communities to stay healthy, fit and happy. As the premier community destination for health and fitness, In-Shape provides functional training, free weights, indoor and outdoor pools, a cardio theatre, pickleball, tennis, and racquetball courts. Plus, In-Shape offers all the latest studio classes like barre, yoga and cycle and the best personal trainers. That’s the #inshapeattitude."

The Maloney Declaration adds: "In-Shape is a regional health club operator. Before the outbreak of COVID-19, In-Shape operated 65 clubs with over 470,000 members. Its clubs offer premium amenities and member-focused community club experiences at tiered pricing levels in secondary markets around California where many high-end health club operators do not have a presence.

ISHC is a wholly-owned subsidiary of In-Shape Holdings, LLC. In-Shape Personal Training, LLC is a wholly-owned subsidiary of ISHC. 

In-Shape was founded in 1981 by Mort Rothbard. Mort Rothbard’s son, Paul Rothbard (“Mr. Rothbard”), was the chief executive officer of In-Shape.

In 2012, Fremont Group purchased 78% of the Company from the Rothbards and their co-investors. Mr. Rothbard continued on as chief executive officer until 2016, after which he remained on ISHC’s board until September 10, 2020. Fremont Group remains the majority equity owner of ISHC.

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